The 401(k)- a failure?

[Big_Hitter]

given a fixed contribution "budget" (call it x percent of payroll or whatever), DB plans provide a greater benefit to full career retirees - there is plenty of material on this issue

I'm not anti DC, each has it's advantages and disadvantages


We may go full circle once the retirement "crisis" truly manifests itself, who knows.

 

[pb4uski]

....I was confused by the DB plans provide the biggest bang for the buck observation too. Certainly not for employers?

+3 If it did provide great bang for the buck companies would not be dropping them like hot potatoes.

 

[Big_Hitter]

they are simply more efficient, that's all I'm saying


contribution volatility, ppa cash calls to get to 80% funded, GAAP balance sheet/expense issues don't exist in DC plans

 

[Big_Hitter]

back on topic, as one poster mentioned, 401k is a law, that's it


people, in general (certainly excluding er.org forum members) don't save, even when presented with great matches and huge tax-advantaged vehicles to do so


to get that nest egg, as also mentioned earlier, requires discipline, a bit of luck and financial accumen

 

[pb4uski]

given a fixed contribution "budget" (call it x percent of payroll or whatever), DB plans provide a greater benefit to full career retirees - there is plenty of material on this issue

I'm not anti DC, each has it's advantages and disadvantages


We may go full circle once the retirement "crisis" truly manifests itself, who knows.

Is that because vested DB participants effectively benefit from contributions relating to DB participants who leave before they vest?

Whereas DC participants don't benefit from unvested contributions and any unvested contributons are returned to the employer/sponser?

 

[Big_Hitter]

correct, plus you have those that terminate vested before retirement age

 

[samclem]

given a fixed contribution "budget" (call it x percent of payroll or whatever), DB plans provide a greater benefit to full career retirees - there is plenty of material on this issue

Oh, I can buy that. But that's not the same as saying the employer (or the employee) gets more bang-for-the-buck for each dollar contributed. That whole "full career" thing excludes a lot of people, and the company "saves" a lot (some of which goes to the full career retirees) by paying a fairly meager benefit to those who leave before that--the vast majority of employees in most jobs in today's world.

A lottery ticket provides great bang-for-the-buck--if you win.

To the extent the 401K has improved the mobility of employees, I think it has had a big positive influence on the economy as a whole by enhancing the efficiency of matching employees to jobs they are best qualified/want to do. OTOH, things that make leaving a job more "sticky" (pension vesting, family heath care provided by employers, etc) make US industries and employees less productive.

 

[MichaelB]

given a fixed contribution "budget" (call it x percent of payroll or whatever), DB plans provide a greater benefit to full career retirees - there is plenty of material on this issue.

Defined benefit often conflicts with fixed contribution. That's one (of many) of the reasons they have been phased out.

 

[Big_Hitter]

certainly employees who change jobs more frequently will find a greater benefit under DC plans, no argument there

 

[Big_Hitter]

Defined benefit often conflicts with fixed contribution. That's one (of many) of the reasons they have been phased out.

agreed, but they can be designed (prospectively) to have fixed contributions

 

[MichaelB]

agreed, but they can be designed (prospectively) to have fixed contributions

Sure, but they then lose the benefit commitment that is implied in all this discussion.

 

[Big_Hitter]

I don't think so - there would just have to be more risk sharing


(getting closer to 500 posts)

 

[pb4uski]

correct, plus you have those that terminate vested before retirement age

But in that case the contribution budget isn't really the same because of the refunds that the company gets on unvested DC balances so you're sort of comparing apples and oranges.

IOW, if the annual contributions before considering refunds of unvested DC balances were the same then DC plan ultimately costs companies less than the DB plan and the flip side is that the participants of the DC plan get less than the DB plan participants because there is no free lunch.

 

[ArkTinkerer]

Or, maybe DB plans cost employers less because of "features" that employees would consider serious drawbacks: Failure to pay out anything if the employee leaves before being vested, crediting formuli that are end-loaded and provide low benefits for the first years of a career if an employee departs, etc.

These items are present in many DC plans as well. You have to be vested in many 401K plans to get the company match. The DC plan that Megacorp offers me has a formula based upon my age and years of service and has a vesting period. I don't think that is unusual.

 

[MichaelB]

I don't think so - there would just have to be more risk sharing

Show me the math where a DB pension plan, as assumed in this thread, is less costly to a business compared with a DC plan.

I'll let others describe the pension, but it is implicitly a fixed % of a final salary! fully vested after 30 years.

 

[Big_Hitter]

Sure - can you guys give me a few days?

 

[athena53]

they (DC plans) are simply more efficient, that's all I'm saying

contribution volatility, ppa cash calls to get to 80% funded, GAAP balance sheet/expense issues don't exist in DC plans

One measure of how much "bang for the buck" employers get by terminating DB and going to DC: one of my former employers, a very large insurer based in Europe, terminated its DB plan to new entrants in the USA around 2004. They already had a generous 401(k) match of 100% of your contribution up to 6% of pay, but people who joined after the pension plan was terminated were given 6% of their salary every year in their 401(k)- in addition to whatever else they saved an regardless of whether they even contributed anything at all out of their pay.

So- this employer preferred paying a fixed 6% to everyone (and vesting was fast- maybe one year) to having a pension plan. Now look at the number of employers who dropped their pension plan and rolled out a 401(k) with a smaller match or even none at all. They got rid of a fixed cost which I have to assume was over 6% and eliminated all the risk of promises made by a DB plan, in return for a generally smaller match, only for those who contributed, with the expenses of the plan paid by the employees.

Yeah, I'd say the employers didn't make that change out of concern for their workforce.

 

[Big_Hitter]

But in that case the contribution budget isn't really the same because of the refunds that the company gets on unvested DC balances so you're sort of comparing apples and oranges.

IOW, if the annual contributions before considering refunds of unvested DC balances were the same then DC plan ultimately costs companies less than the DB plan and the flip side is that the participants of the DC plan get less than the DB plan participants because there is no free lunch.

the DB plan contributions, if broken out on an individual basis, are age-weighted (i.e. much higher at the older ages as the ppt closes in on retirement) - plus DC plans have a shorter statutory vesting schedule, generally 3 versus 5 years for traditional DB plans

 

[meierlde]

Sure, we all know some good and some bad employers, but they aren't all bad.

5 Employers With Generous 401(k) Matches - US News

McDonald's. The company that invented extra-large fries and soda provides many of its employees with a supersized 401(k) match. McDonald's matches each dollar an employee contributes to the 401(k) plan with three dollars, up to the first 1 percent of pay. For employees age 21 and older who have been with the company for at least a year, the company also matches a dollar for each dollar saved on the next 4 percent of pay.​

From further googling I see there is a 20 hours minimum you need to work to qualify for 401(k), profit sharing, and the stock purchase plan. Seems reasonable to me.

This of course is McDonalds corporate, and not the franchisees that run most locations. One needs to be careful and not confuse the employees of the franchisees and the corporation.

 

[purplesky]

There are several issues with 401ks and the analysis. 1) people don't stay at the same company for years, so many will have multiple 401ks or more likely their 401ks get cashed out.. which undermines the whole things. Sorry but if you leave your job and have $1300 saved say.. you then get that check in the mail.. the fact is MOST people don't roll it over. This whole thing of if < $5K then send them a check is a serious problem. 2) too many companies no longer match..so when your company isn't matching the incentive is really not there 3) while target dates are great, small companies are being hosed and their plans are terrible. 4) who educates these people to invest?? ie a poor person has never bought a stock in their entire life, so you aren't learning it from your parents, and your not learning it from school, so you get the 20 minute talk from the 401k advisor who wants to take 1-2% of your money to invest for you. robbing the poor even more blind.


The 401k is great for people in the upper tax brackets, that have matching, that make enough money to max it out every year and know how to invest and have the options to invest. It was really my only write off when working.. saving me 1000s on taxes, sure I'll take that any day. I just don't know if I'd think the same if I was in the 15% tax bracket with bad funds, no matching.. I'd much more likely be putting money into a ROTH IRA...and since you don't make that much, the limits there suffice.

These are all valid reasons why the 401k is a big fail for the avg. worker.

I fall into a higher tax bracket and I am able to easily max out my 401k(no match) and Roth. Although I do live way below my means to super save.
So whats left of take home pay puts me in the avg. income range.


I do the catch up contributions which brings down my taxable income even
more.

 

[Big_Hitter]

One measure of how much "bang for the buck" employers get by terminating DB and going to DC: one of my former employers, a very large insurer based in Europe, terminated its DB plan to new entrants in the USA around 2004. They already had a generous 401(k) match of 100% of your contribution up to 6% of pay, but people who joined after the pension plan was terminated were given 6% of their salary every year in their 401(k)- in addition to whatever else they saved an regardless of whether they even contributed anything at all out of their pay.

So- this employer preferred paying a fixed 6% to everyone (and vesting was fast- maybe one year) to having a pension plan. Now look at the number of employers who dropped their pension plan and rolled out a 401(k) with a smaller match or even none at all. They got rid of a fixed cost which I have to assume was over 6% and eliminated all the risk of promises made by a DB plan, in return for a generally smaller match, only for those who contributed, with the expenses of the plan paid by the employees.

Yeah, I'd say the employers didn't make that change out of concern for their workforce.

in your case they probably made a business decision to reduce costs and reduce contribution volatility


back in the golden days of pensions with funds heavily invested in equities and high interest rates everyone was fat and happy


then during the 2000 crash, equities tanked and rates dropped, a lot


companies started taking GAAP charges to equity and faced, many for the first time in years, significant statutorily required pension contributions


hence the shift to DC plans

 

[Midpack]

I've already found a few studies that show for the same benefit, DB plans can be more cost effective than DC plans. However, that's assuming full participation. That may be appropriate for a true comparison, but it's not the reality. DB plans are cheaper if all employees participate in DC plans, but they clearly don't. Everyone who would have a DB plan, wouldn't necessarily participate in a DC plan at any given company. So employers are saving via DC plans in part because participation is less than DB (full) plans, and avoiding the long term liability.

Hmmmmm....hadn't thought about that.

Another article said that while companies saved a lot by dumping DB plans and going to DC plans or combinations thereof, the savings came largely from reducing employee benefits at the same time. And companies also didn't want the uncertainty of an ongoing DB liability, especially with the COL calculations that were built in to many plans and after the double whammy of very high inflation back in the early 80's and globalization hurting many industries back around that time.

I'd still be beyond shocked to see DB plans come back...

 

[Big_Hitter]

I'd still be beyond shocked to see DB plans come back...

the only vehicle that can quickly make up for lost time is the DB vehicle; it would be expensive tho

 

[Mulligan]

I've already found a few studies that show for the same benefit, DB plans can be more cost effective than DC plans. However, that's assuming full participation. That may be appropriate for a true comparison, but it's not the reality. DB plans are cheaper if all employees participate in DC plans, but they clearly don't. Everyone who would have a DB plan, wouldn't necessarily participate in a DC plan at any given company. So employers are saving via DC plans in part because participation is less than DB (full) plans, and avoiding the long term liability.

Hmmmmm....hadn't thought about that.

Another article said that while companies saved a lot by dumping DB plans and going to DC plans or combinations thereof, the savings came largely from reducing employee benefits at the same time. And companies also didn't want the uncertainty of an ongoing DB liability, especially with the COL calculations that were built in to many plans and after the double whammy of very high inflation back in the early 80's and globalization hurting many industries back around that time.

I'd still be beyond shocked to see DB plans come back...

I would also.... For the employees benefit, yes the DB generally are more efficient in pooling big amounts of money with professional money management ($40 Billion in my case). But the biggest reason that benefits employees is the same reason employers want to shed them....Time and Risk...Pooled monies in a pension can absorb the yearly fluctuations of the market without a person staring at their 401k balance dwindling and going into a panic attack. Longevity insurance is baked in also for the individual.
But that leaves the employer on the hook. Of course many would prefer 401k for beneficiaries and control of their money. But for average Joe just making it month to month, a monthly retirement check sans the inheritance they never had to give away anyhow wouldn't matter.


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[purplesky]

back on topic, as one poster mentioned, 401k is a law, that's it


people, in general (certainly excluding er.org forum members) don't save, even when presented with great matches and huge tax-advantaged vehicles to do so


to get that nest egg, as also mentioned earlier, requires discipline, a bit of luck and financial accumen

It takes high income to get that nest egg and a huge tax savings. Much luck.

The 401k was not created for the middle-class.

Pensions were completely abandoned to increase corporate profits.

Corporations now have their capitol and the taxpayers got the bill.

Some call it Corporate socialism.